After Western Oil fell for 2 months, Buffett increased his holdings by 4.31 million shares in the past two weeks, spending about $260 million, with an average purchase price of around $60. After these two purchases, Berkshire Hathaway now holds approximately 28.4% of Western Oil's shares. Since Buffett made a big purchase of Western Oil in 2022, he has been buying more whenever the stock price falls below $60, with the strong support of the biggest buyer Buffett, causing Western Oil's stock price to hit a low of $55 in the past 2 years. However, from last year to now, due to oil prices performing below 2022 levels, Western Oil rose to around $70 at its peak, then fluctuated in the $60-70 range. For Buffett, a good company that rises slowly provides ample opportunities to buy, but for investors who copy his moves, the two-year fluctuation has tested many people's patience. So, is it worth buying Western Oil at $60 now? I. The Origin of the Stock God and Western Oil Looking back at the reasons Buffett bought Western Oil, reviewing the stock god's trading records over the past 2 years, he first established a position at $40, and subsequent increases were completed at the $55-60 price range. Continuously increasing holdings at the same price is related to the stock god's assistance to Western Oil in a financing deal in 2019. In April 2019, Western Oil and Chevron engaged in a bidding war for the oil company Anadarko (Chevron is also one of Buffett's major holdings). Chevron offered $33 billion and, with a higher bid, signed an investment agreement with Anadarko ahead of time. Later, Western Oil's CEO sought Buffett's help and received $10 billion in acquisition funding. With Buffett's support, Western Oil made a $38 billion bid and successfully acquired Anadarko. In exchange, Berkshire Hathaway received $10 billion in Western Oil preferred shares with an 8% dividend yield, along with warrants to subscribe for 80 million common shares at a price of $62.5 per share. This means that at the time, Buffett believed the company's intrinsic value was above $62.5 per share, similar to the company's stock price at the time, with a PE ratio of 11 times and a PB ratio of 2.2 times. In an interview, Buffett stated that the subscription agreement was a bet on long-term oil price increases. The preferred shares provide an 8% dividend yield, and with the company's dividend yield at 5-6% that year, this deal provided Buffett with a significant margin of safety
Although Western Oil won the merger battle, small and medium shareholders believe that the acquisition brought considerable debt pressure (USD 13 billion in bonds + USD 10 billion in preferred shares + USD 8.8 billion in loans), with the company's cash on hand in 2019 only at USD 3.5 billion. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/43ff6bb3a7294c18930dc5ac6675a1bd.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/43ff6bb3a7294c18930dc5ac6675a1bd.jpg"/> Due to debt concerns, small and medium shareholders do not see this as a good acquisition and started selling Western Oil. From April 2019 to early 2020, Western Oil once dropped by 30%. However, Buffett believed this was a mistake and continued to increase his holdings during the decline, holding approximately 19 million shares in total. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/45deea71d1dc46249cb29e707fa0ab32.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/45deea71d1dc46249cb29e707fa0ab32.jpg"/> Unexpectedly for Buffett, the global pandemic broke out in 2020, causing oil prices to drop to negative, leading Western Oil into a bankruptcy crisis. Buffett cleared his position in Western Oil stocks at the bottom, losing nearly 70%, totaling a loss of USD 550 million. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/6e9cf5ccea59413f8bb70ef5aaf662c1.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/6e9cf5ccea59413f8bb70ef5aaf662c1.jpg"/> In terms of performance, Western Oil suffered a net loss of USD 14.8 billion in 2020, and the stock price dropped from 40 to 10 USD. With significant losses and heavy debt, Western Oil only distributed USD 0.35 billion in dividends in 2020, far below the level of over USD 2 billion in dividends in previous years. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/ba1be2108d5d4caca6326f9b682b5de3.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/ba1be2108d5d4caca6326f9b682b5de3.jpg"/> Given this dire situation, even though Western Oil rebounded along with oil prices in the second half of 2020, Buffett did not repurchase Western Oil. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/3cc5cc0657bc4d6398bede0512d63973.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/3cc5cc0657bc4d6398bede0512d63973.jpg"/> It wasn't until the 2021 annual report meeting that the CEO of Western Oil stated that the company will no longer engage in large-scale production increases and acquisitions in the future. The money earned will be used to reduce company debt first, followed by redeeming preferred shares, and then resuming dividends and stock buybacks. At the same time, most oil and gas companies in the United States are no longer expanding investments, but rather shrinking them, with the industry's supply side contracting faster than the demand side. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/cf97dc92f7224fd399542633ffa6bb7b.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/cf97dc92f7224fd399542633ffa6bb7b.jpg"/> As the pandemic dissipates, oil prices have risen from USD 50 at the end of 2020 to USD 110 in 2022
<img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/6bfcee74ef22422c8f407b5da1e31dcd.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/6bfcee74ef22422c8f407b5da1e31dcd.jpg"/>According to Buffett at the shareholders' meeting, he learned that Occidental Petroleum prioritizes debt repayment and will not aggressively expand production in the future, so he decided to buy back Occidental Petroleum. In March 2022, Buffett bought 14% of the outstanding shares of Occidental Petroleum, and continued to buy in the third quarter of 2022 until the holding percentage exceeded 20%. According to SEC filings, due to anti-dilution clauses in the financing agreement, Buffett's exercise price dropped to $59.6, and the number of exercise shares changed to 83.86 million. Over the past two years, Buffett has been increasing his holdings in the range of $55-60 because it is close to his original cost. According to whalewisdom statistics, as of 2024Q1, Buffett's cost price for Occidental Petroleum is around $50.To some extent, Occidental Petroleum's decision not to expand production in the future is more attractive to Buffett than in 2019. Because in the past during the expansion or M&amp;A phase, more risks and competition had to be considered. And after deciding not to expand production on a large scale, as long as the oil price meets Buffett's judgment of &#34;long-term&#34; rise, with limited supply, the money earned by the company is used for shareholder returns, turning the company into a cash cow, which is also one of Buffett's favorite investment models. This logic is somewhat similar to coal companies after supply-side reforms, where new energy is replacing traditional energy, causing traditional energy companies to be unwilling to expand production, while demand for traditional energy still exists. In addition to the impact of geopolitics on oil-producing countries, this has led to shortages. Second, what makes Occidental Petroleum attractive? In the past year, Buffett's stake has increased from 19% to 28.5%, with such a large increase in holdings, yet the stock price has still fallen by 5% since January last year, which is indeed a bit difficult for individual investors to hold. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/dc064eff622b47969657c7128d4f5e47.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/dc064eff622b47969657c7128d4f5e47.jpg"/> From Buffett's perspective, as Munger mentioned before, holding Occidental Petroleum and Chevron is equivalent to owning oil and natural gas resources in the Permian Basin. Why choose these two companies? First, from a trading perspective, Berkshire Hathaway is large enough to find few U.S. oil and gas companies that meet Buffett's investment requirements and can accept large-scale holdings. Most investors believe that Buffett wants to occupy a certain share in the U.S. oil industry, which is a more forward-looking strategic investment. Second, from the perspective of shareholder returns, in 2023, only 3 oil and gas companies achieved positive growth in shareholder returns, namely Chevron, Occidental Petroleum, and ExxonMobil. The year-on-year decline in cash flow of major oil and gas companies in 2023 is around 20-25%, and in this situation, maintaining positive growth in shareholder returns is the biggest advantage for these 3 companies.
The proportion of shareholder returns to free cash flow for Chevron and ExxonMobil has increased to over 90%, while for ConocoPhillips it has exceeded 120%. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/c89cadf5faf34b2780a3798a9ff936e3.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/c89cadf5faf34b2780a3798a9ff936e3.jpg"/> Image Source: CyberShaman Furthermore, compared to peers, it can be seen that Chevron and ExxonMobil have the smallest capital expenditures in the industry, yet they have the best shareholder returns. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/94eb7c4db78f48c3bbe154e43edba7ce.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/94eb7c4db78f48c3bbe154e43edba7ce.jpg"/> Image Source: CyberShaman Although ExxonMobil's shareholder returns are among the top in the industry, it must be noted that due to Warren Buffett holding 8% interest in $10 billion preferred shares, along with $674 million in dividends over 23 years, the dividend yield is 1.27%. Even if the stock price does not rise, there is a high interest income. However, compared to small shareholders, the amount received is much less. This explains why Buffett wants to buy ExxonMobil. If future profits increase and liabilities decrease, leading to an increase in dividend returns to shareholders, pushing the dividend yield to historical levels of around 3-5%, just the interest income alone could yield 8-10%. Of course, the $10 billion preferred shares will eventually be repurchased, which also explains why Buffett continues to buy. The potential for significant interest income in the future is one of the reasons. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/caa3d837100d48d99fb5b58433ac77cf.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/caa3d837100d48d99fb5b58433ac77cf.jpg"/> So, why do Chevron and ExxonMobil choose to have the lowest capital expenditures while providing the highest shareholder returns in the industry? This can be illustrated by looking at the performance in the first quarter of this year. Compared to the first quarter of last year, the oil price has remained relatively stable, around 70-80 yuan. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/cc3e12e1529243d5b371058563d6188a.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240614/cc3e12e1529243d5b371058563d6188a.jpg"/> However, in the first quarter of this year, ExxonMobil's revenue was $5.975 billion, a year-on-year decrease of 17.3%, with a net profit of $880 million, a year-on-year decrease of 29.7%. Another company in Buffett's portfolio, ConocoPhillips, had first quarter revenue of $48 billion, a year-on-year decrease of 4.8%, with a net profit of $5.5 billion, a year-on-year decrease of 16.3%. Looking at the trend of crude oil, the oil price rose from 75 yuan to 87 yuan in the first quarter, prompting many oil and gas companies to increase their exploration efforts. When drilling these oil wells, a large amount of associated natural gas is produced
Due to the warm winter in the United States this year, natural gas demand is in a shrinking state, with inventory levels nearly 40% higher than the average level of the past 5 years. In addition, increased natural gas supply during oil extraction has led to lower natural gas prices in the United States compared to last year, even reaching negative prices in April. This downward trend in natural gas prices will greatly impact the performance of US oil and gas companies. It is more prudent to create more shareholder returns, reduce leverage, and use the remaining money for shareholder returns and potential mergers during a period of decent oil prices. For example, Western Oil may have a future dividend yield of 3-5%, plus Buffett's 8% preferred stock interest, while Chevron's dividend yield is 4-6%. Conclusion: As cash flow is prioritized for debt repayment, dividend repurchases are not attractive to small shareholders at the current stage. From a valuation perspective, Western Oil's PE is around 15 times, which is far below CNOOC's A/H shares in terms of operational capabilities or dividend returns. The PE ratio of CNOOC's H shares is around 6.5 times, with a dividend yield of nearly 6%. For investors, Chinese oil stocks are more undervalued, but unfortunately, even Buffett cannot buy Hong Kong stocks. However, it is worth noting that the stock god took 3 years to build a position in Apple and only saw a significant increase after 5 years. Looking ahead, this investment will require more patience.
Image source: CyberShaman

For Buffett, a good company that rises slowly and gives plenty of opportunities to buy is a good thing. However, for investors who copy homework, two years of volatility have worn out many people's patience. If you want to copy the stock god's homework, is Western Petroleum at 60 yuan really worth buying now?

Western Oil, the stock god is increasing his holdings again, will you follow?